“Taxes are the price we pay for civilisation,” claimed Oliver Wendell Holmes, Jr. Judging by the current record high level of taxation in the UK, what passes for civilisation would seem to be getting rather expensive.
But then, isn’t everything? Food, fuel, rent, clothing… why would anyone expect civilisation to buck the trend? After all, isn’t it a “good” that we pay for like anything else?
We pay for a parliament to enact laws; a police force to enforce them; and a judiciary to adjudicate whatever disputes might arise.
We pay for a military to protect our borders, our seas and our airspace at home and our national interests abroad.
We pay for a national health service which, according to the typical morning news headlines, is always teetering on the edge of crisis.
None of the above is new. All of the above institutions have existed in some form for over a century. But, as with all things, they are getting ever more expensive.
But this begs the question of “why?” Why should civilisation be getting more expensive? After all, aren’t we as a people, a nation, somewhat more civilised than we used to be? Wyatt’s Rebellion, the Wars of the Roses, the Civil War, the Glorious Revolution, the Peterloo Massacre and other rather more uncivilised episodes happened ages ago. However the media may be portraying things, we’re far from similar episodes today.
Many of today’s schoolchildren probably couldn’t even explain what these events were even about. Nor would most of them care. But if we’re more civilised now than we were back then, shouldn’t the price we pay to keep ourselves in line be declining, rather than increasing?
History is bunk, as they say. But let’s take a look at some things that have happened rather more recently. It might help to explain this “civilisation inflation”.
First, let’s take a closer look at the record high level of tax. As it happens, there are over 100 different kinds of UK tax. But according to a 2022 House of Commons Library report, the bulk of UK tax receipts are from the following:
- Income tax £228bn
- National Insurance £161bn
- Value-added tax £143bn
- Corporation tax £66bn
- Capital (eg Stamp Duty) tax £41bn
- Council tax £40bn
- Fuel duty £26bn
- Tobacco and alcohol duty £23bn
- Business rates £22bn
“Other” taxes, that is from the circa 100 other taxes/duties/etc out there, comprise about £61 billion. That is about as much as fuel/tobacco/alcohol duties and business rates combined, so it is not exactly a small figure.
Where specifically is the civilisation inflation you ask? Well, according to the House of Commons report, almost all of the above taxes are higher today as a percentage of national income than they were a generation ago. A notable exception is corporation tax, which is unchanged.
In other words, there has been civilisation inflation right across the board, much as is the case for inflation generally. Let’s now take a look at the current breakdown of the UK consumer price index over the past year:
Source: Office for National Statistics
Note that there is not a single sub-category of consumer prices that has not risen over the past year. Inflation is everywhere you look.
Economists like to explain inflation as “too much money chasing too few goods”. Could it be that the reason why the price of everything, civilisation included, is rising, is because there is too much money being pumped into the economy?
It certainly appears that way. UK money supply growth has been rising by high-single or double-digits in recent years, presaging the more recent, double-digit surge in consumer prices.
Yes, the Bank of England has begun to raise interest rates, ostensibly to slow this down: that is why mortgage rates have soared and house prices are no longer rising along with everything else. But this helps to illustrate the point that the previous, record house price inflation was very much a monetary phenomenon, or a Bank of England policy as it were.
But consider: as the price of everything rises, other factors being equal, so does the tax burden. Stamp duty, a tax that didn’t exist a generation ago, has been one of the fastest rising taxes since its introduction. As house prices have risen, more and more homeowners have been sucked into it as their property valuations pass through the various thresholds.
Inflation is, thus, the evil twin of tax. What the Bank of England “gives” in the way of low mortgage costs – thereby fuelling monetary inflation – the tax man taketh away.
This applies to all so-called “bracket creep” taxes, in which static tax thresholds, amidst rising asset prices, or salaries, automatically increase the tax share of property and income.
Unlike households, the government inherently benefits from inflation. This is partly because government tax receipts grow with inflationary bracket creep.
It is also because the government is in the business of spending new money into existence through borrowing directly financed by the Bank of England. Given that gilts provide the UK’s monetary asset base, the government is always ahead of the inflationary curve. It spends at current prices, rather than at future, inflated prices. And as long as the Bank obliges by buying up some portion of the new debt issued to finance such spending, the government can continue to do so indefinitely.
Moreover, this public consumption of limited economic capital “crowds out” the private sector’s access to such capital. Hence businesses end up paying more for whatever resources they need to produce the goods and services their customers want. It is small wonder that UK productivity growth has been so weak in recent years, as business struggle for the resources they need.
So yes, civilisation is indeed getting more expensive. The evil twins of inflation and tax have seen to that. UK households may be none too pleased. Recent polls show huge voter dissatisfaction with all major political parties. Someday, households might even revolt. But wouldn’t revolting against the rising cost of civilisation be uncivilised?
I’ll need to think about that one…
Contributor, Fortune & Freedom